Rackspace rides OpenStack, lassos chubby, cloudy cash cow

'Open cloud and fanatical outcomes' – and that's fanatical in a good way

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Rackspace Hosting is doing something right – many things, actually – as proven by its latest financial report that revealed hefty increases in customers, revenues, and profits.

The company started out small, and has only recently entered the ranks of large enterprises with its dedicated hosting and now cloud computing services based on the OpenStack cloud control freak. And it has not forgotten its own small-biz roots, as it is counting on SMBs from the world over to flock to its Rackspace Cloud for their computing, storage, and application services needs.

In the quarter ended in December, Rackspace had 205,538 customers, up 19.2 per cent from the year-ago period. Most of those customers are SMBs, even though the adoption of OpenStack in the Rackspace Cloud last year has the company getting its foot in the door for proofs-of-concept at large enterprises at a rate that was not possible two-and-a-half years ago, ahead of the formation of the OpenStack effort with NASA.

In a conference call with Wall Street analysts going over the fourth quarter and year-end numbers, CEO Lanham Napier said that the Rackspace Cloud has largely closed the gap with larger rival Amazon Web Services, and that was helping to drive business.

"We feel that we positioned ourselves well to lead the open cloud movement," Napier explained. "That's pretty powerful, and we think our path to greatness is open cloud and fanatical outcomes."

Rackspace's commitment to the "Open" part of OpenStack has been demonstrated with last year's formation of the OpenStack foundation, and the company has just made a commitment to use open source hardware based on modified Open Compute Project specs and manufactured by ODMs WiWynn, Quanta, and Delta.

As for fanaticism in tech support, Rackspace customers have to judge that for themselves. (For the record, El Reg is hosted at Rackspace, but I have no idea how well or poorly we are treated.)

In the fourth quarter, revenues at Rackspace rose even faster than customer count, jumping 24.6 per cent to $352.9m, but net income grew almost in synch with customer count growth, rising 19.5 per cent to $29.9m.

CFO Karl Pichler said that the profits would wiggle up and down more than in the past, when Rackspace was mostly involved in dedicated hosting, because cloud build-out is done ahead of demand but with dedicated hosting, and you buy the servers as you need them. People want cloud capacity instantly, and because the OpenStack variant of the Rackspace Cloud is new, the company has to build in some spare capacity.

Revenue will be a bit more wiggly, too, Napier warned.

"Growth in cloud is not linear," he explained. "It is a consumption model. And even though we have linear growth in the fourth quarter, it is not always going to be that way."

In the December quarter, dedicated cloud (which is what used to be called hosting and which is an annoying misnomer – but that's marketing for you) raked in $265.6m for Rackspace, up 18.1 per cent year-on-year. The public cloud, however, exploded by 49.4 per cent to $87.3m, and Napier said that most of that growth represented new customers adopting its new OpenStack-driven public cloud. Existing customers are gradually migrating to the new OpenStack platform from the quasi-proprietary cloud control freak used previously.

Employee count rose by 20.1 per cent to 4,852 in the past year, server count rose by only 13.4 per cent to 90,524, and average revenue per server increased for the 14th quarter in a row to $1,310 per box. That's a rise of 10 per cent in revenue per box, so you can see one of the effects of using virty infrastructure instead of dedicated hosting. Customer count outgrows server count, and as Rackspace shifts increasingly to what we presume are both denser and cheaper Open Compute machines, its cost per server should drop so its profit per server should rise – and its profit per customer should rise even faster.

For the full year, Rackspace brought in $1.31bn in sales, up 27.7 per cent, and net income rose even faster, shooting up 38 percent to $105.4m.

Rackspace doesn't do revenue guidance, but Pichler did say that the company was budgeting somewhere between $375m to $445m in capital expenditures for 2013. Of this, between $235m and $275m would be for IT equipment, $30m to $40m would be for expanding data center capacity (which costs about $5m per megawatt), $20m to $30m would be for expanding office space, and $90m to $100m would be for software development.

A lot of that software development has to do with OpenStack and related cloud services, of course, and there is probably some software that those of us on the outside don't know about that is not yet part of OpenStack – and may never be. ®